The Long and the Short of it: Evidence of Year-End Price Manipulation by Short Sellers (2011)

We identify a setting in which there is a predictable incentive for short sellers to manipulate prices, and we find patterns consistent with short sellers manipulating prices. Specifically, we find that stocks with high short interest experience abnormally low returns on the last trading day of the year. This effect is strongest (1) among stocks that are easily manipulated and (2) during the last hour of trading. This effect reverses at the beginning of the year, consistent with the temporary nature of price manipulation. We show that hedge funds’ portfolios are closely related to market-wide short interest, suggesting that hedge funds, with their convex compensation structures, may generate the patterns we observe.

Presented at 2012 American Finance Association meetings in Chicago, IL.